This Beverage Company's Sluggish Quarter Is a Buying Opportunity

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coca-Cola (NYSE: KO), a favorite long-term investment idea of legendary investor Warren Buffett, has experienced a sluggish period, returning only 10.95% since the beginning of the year. Coca-Cola’s year-to-date return has lagged the S&P 500’s gain of more than 17.50% during the same period.

Recently, it reported disappointing second-quarter earnings results. Should investors stay away because of its recent results? Or does it represent a buying opportunity for long-term investors? Let’s take a closer look.

Sluggish second-quarter earnings and 2020 vision

In the second quarter of 2013, Coca-Cola generated nearly $12.75 billion in operating revenue, 3% lower than operating revenue of $13 billion in the second quarter last year. The operating income came in at $3.24 billion, 2% lower than operating income in Q2 2012. Excluding currency impact, Coca-Cola experienced growth in emerging markets including Eurasia & Africa (19%), Latin America (13%), and Bottling Investments (12%).

The North American and Pacific region's operating results stayed flat while the operating income of the European region declined 3%. Coca-Cola’s Chairman and CEO commented that the second-quarter results came in below his expectations, due to “challenging global macroeconomic environment and unusually poor weather conditions in the quarter.”

Despite the sluggish second-quarter earnings results, Muhtar Kent remained confident that the company can fulfill its 2020 Vision. The company expects to grow its nonalcoholic ready-to-drinks (NARTD) in a large, growing consumer base. The NARTD market has a large population of 585 million, 37% under the age of 21 and more than 18 million in the emerging middle class.

Coca-Cola brand is still the number one in the NARTD market. Fanta and Sprite brands are reported to be the leaders in every market with a loyal consumer base, while Del Valle is considered a leader in still beverages. By 2020, Coca-Cola expects that it would more than double system revenue while raising system margins. It is also estimated to more than double its servings to more than 3 billion a day, translating into around 3%-4% annual volume growth.

PepsiCo and Mondelez could be opportunistic plays

At $40.20 per share, Coca-Cola is worth $179 billion on the market. The market values Coca-Cola at 15.1 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). The second-biggest soft drink player, PepsiCo (NYSE: PEP) has a much lower valuation. PepsiCo is trading at $84.10 per share with a total market cap of nearly $130 billion.

The market values PepsiCo at 12.73 times its trailing EBITDA. Interestingly, PepsiCo’s food business, including Frito-Lay, has grown quite rapidly. In 2012, Frito-Lay North America was the company’s largest operating profit contributor, with nearly $3.65 billion in profit, while PepsiCo Americas Beverages was the second-largest segment with nearly $2.94 billion in operating income. For the full year 2013, PepsiCo is expected to return as much as $6.4 billion to shareholders via both dividends and share buybacks, creating a total yield of 4.9%.

Recently, activist investor Nelson Peltz has shown his interest in PepsiCo and another growing food giant, Mondelez International (NASDAQ: MDLZ). It was reported that his total investment in both companies was around $2.7 billion. Mondelez concentrates its efforts on emerging markets, accounting for around 45.4% of its total revenue. It concentrates its efforts on BRIC regions (Brazil, Russia, India, and China).

For the full year 2013, Mondelez expects to generate around $1.55 to $1.60 per share in earnings with organic revenue growth of 5%-7%. Many investors believe that Nelson Peltz might want to merge PepsiCo’s food business with Mondelez to create the most dominating food business in the world. Mondelez is trading at $29.90 per share with a total market cap around $53 billion. The market values Mondelez at 13.64 times its trailing EBITDA.

My Foolish take

Coca-Cola seems to be the most expensively valued company among the three. However, with a leading position in the soft drink market and the ongoing efforts to achieve its 2020 Vision, Coca-Cola is truly a long-term investment opportunity for patient investors at its current trading price. Mondelez and PepsiCo, along with activist investor Nelson Peltz, could be opportunistic plays. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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